Never invest by borrowing in share market: Prashant Jain, HDFC Mutual Fund

Prashant Jain, Executive Director & Chief Investment Officer (CIO), HDFC Mutual Fund, talks about the ongoing fall in the domestic stock market, the risk that the Indian market may face due to COVID-19, the difference between 2008 and 2020 fall and opportunity for retail investors at present among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:

Q: Are we going through a crisis in which the markets, which were already 20% low have taken an additional 10% circuit? Do you think that there is a crisis?

A: I don't think that there is a crisis but this is the reality of the market. And, we can learn a few basics of the share bazaar from whatsoever has occurred in the last few days. Possibly, someone would have said that such a correction can be seen in the market. But, the situation sends a clear message that timing the market in the short term is just impossible. I have seen such a situation at least 3-4 times, in the last 30 years of my career, where such a huge fall has been seen in the market. The second learning is about the role of the asset allocation and holding capacity, for instance, those who would have invested after borrowing or by stretching their limits, or have invested in future and options (F&O) and can't return the margin then this loss will turn up to be a permanent loss for them and they will never be able to recover from here. That is why I usually suggest, a person's equity investment should be under his/her holding capacity as well as risk capacity that one can hold. 

Thirdly, when I have seen that selling comes from the foreign institutional investors (FIIs) when such a deep correction occurs in the Indian market due to global events - like 9/11 incident, Lehman crisis, Brexit tempering or something else - at least when the Indian economy is doing well and our market is not expensive, because there is trouble in the global market or redemption in funds, which follows here. Interestingly, my investments made during such a selling situation has turned up to be a good opportunity after a few years. These are the situation when few people have the wisdom to make a correct judgement as the maximum of them are not in a situation to make a decision. Thus, this is a situation when valuation reaches an extreme level and this is a situation when people with risk-taking capacity should invest and those who don't have the ability should try to hold with whatsoever they have and must not withdraw their money from the market. 

Q: This means they must not exit because they are late?

A: I would not say that. And even one month ago I used to say that you should not exit as no one was aware of this correction and Indian market was not expensive then too. The returns from the market, for the last few years, has been quite low due and this is a reason that the market has been cheap, which became cheaper after this correction. There are several big and leading companies whose dividend yield is higher than your interest rate. And, they are not going to hold on the dividend because this coronavirus impact is likely to be - I am not giving a guarantee for it but there are reasonable predictions - end in the next 2-3 months. For instance, China the maximum impacted country has been able to control it. And, a Chinese expert who advised its government has said that the epidemic can be brought under control by June if the government takes the right step to have a control on it. He believes that its impact will reduce with temperature rise. 

Q: The global market didn't respond to what happened in China but it reacted after the issue reached to Europe and America. Now, I would like to know what will happen if it comes to India, may when it will be eradicated in these Europe and the US? Do you think there is a risk related to it?

A: You can say if you want to go foresee an extreme situation. But, what made the market to fall by 20-25%, at least when corona doesn't have any impact on the economy, maybe the fear that things will worsen more. It is difficult to guess what the market is pricing and discounting in a short-term. But I would like to say that it will not have an impact on every business. It can have an impact on consumption because tourism will either be stopped or reduce and travel will come down. It can also have an impact on income a bit. But there are several businesses - like investment, oil and gas, power and powerful banks - where they will make an impact. But if you want to say that the market will not fall more from these levels than I will not say so because risk always prevails in the market. But I think, if we will think of next one-two years at these levels than our risk-reward will be favourable and I have seen just two or three such opportunities in my entire career the previous two were in 2008 and 2001. 

Q: I would like to compare it with 2008 as we have fallen almost 33% from 12,400 at Nifty and we noticed a fall of around 55% in 2008. What are the similarities and differences between 2008 and 2020? 

 A: This is a good question but we can't compare two things with each other. Some people are saying that why it will not fall in the way as it happened in 2008 so there is a basic reason for it that then India's market cap before the fall of 2008 was almost one and a half times more than our economy, market cap's ratio to GDP stood at 150% at that time. But today before this fall, the ratio stood at 70%. So, our evaluation from the starting point is half in itself. I think today's market cap is to GDP of India has already reached the level that occurred at the bottom of the Lehman crisis. So, there are such companies in India whose dividend yield is either equal or double to its interest rate, i.e. interest rate is 5% but the dividend yield stands at 10-12%, but I can't name them. And, these are not such companies where the dividend will reduce in itself or will be washed out and that's why we must not compare this situation with the Lehman crisis. 

Secondly, our economy was growing at a fast speed before the Lehman crisis and our GDP growth was very high due to massive CapEx was in place. Thus, the economy was sitting at its peak in terms of growth rate but this time, the economy was hitting its bottom and was at a take-off stage but this coronavirus had an impact on us at such a time. Possibly, it may have an impact on our growth for the next one-two quarters. However, the reforms, which were introduced in past, has had its negative effect and the interest rates are down and we have progressed a lot in IBC. The government policies like an investment of the pension fund in infrastructure and manufacturing are good policy. I think it will have a positive impact, however, it is a wrong thought, and that is that the competitiveness of the world's manufacturing hub/base China has gone down because our wages are lower than them. That's why manufacturing was moving out from China but this event, coronavirus, will highlight the excessive dependency on one country and thus this shift may provide a situation of urgency, which is a big opportunity for us. That's why the government has provided a 15% tax rebate to new manufacturing units if they are started before March 23. That's why I think that India can progress in the manufacturing segment in the next 3-5 years in the way it has made its place in terms of services. 

Q: 2008 was a year when we were mostly dependent on FIIs but this time, our domestic investors are matured and smart as they haven't closed their SIPs or not going for redemption and are investing at a regular interval. At the same time, domestic funds including HDFC Mutual Fund are quite large than several FIIs. So, this is a comfort zone and one should consider that the Indian markets will not face a huge fall? 

A: This is a nice question and we do provide a slide on it in our presentations. Two years ago there was a situation in which selling from FIIs used to weaken the market, however, in these 7-10 days lot of selling has happened around Rs25,000-30,000 crore. But I think that the market hasn't seen such an impact as it used to happen in the past because the local fund size is very big and our flows are stable and I think that there will be a rise in net inflows because the net figure comes after subtracting the redemptions from gross inflows. It has been seen that when the market is down there is a decrease in redemption and that's why there is an increase in net flow. But, if you want a reliable indicator for the return of upcoming 3-5 years then you should have a look at the valuation at the time of investment. Low PE investing seldom fell. Usually, people have a look at events but I can just say that you may not face any problems if you make your investment in low PE. 

Q: But there is an issue that the Lowest PE of around 8 or 9 were created in 2008 in Nifty and we are still above that level?

A: In my experience, I have seen the PE at 9-11 levels only once in 2001. During the peak of 2008, our PE stood at 25, which came down somewhere between 12-14. 

Q: Thus we are well-positioned at present?

A: I have already said that our corporate profitability and economy was at its peak in 2008 but today the corporate profitability as a percentage of GDP is at its bottom. If you estimate the things by looking at the PEs of a year ago or two when the banks were at a loss then you may go wrong but if you have a look on the price to book or the market cap to GDP then it stands around the lows of 2008. So, having an eye on the future PE will not create problems. 

Q: I have Rs 100 in my pocket and wish to invest it in the mutual fund. So, let me know how and when to invest and the type of fund where it should be invested?

A: Investing is simple if you think in the right manner and you may complex it as much as you want. The investor should ask just two questions (i) whatever cash is available with him that he will not need for the next 3-5 years and (ii) the amount of money and the portion of wealth where he/she can bear a 10-15% downside. 

Q: What if I will not have a look at this Rs100 for the next five years and I can tolerate a 20-25% fall in my portfolio? 

A: Then you can invest the entire money in equities and I think you should invest it into 2-3 good diversified funds. I have seen that large-cap companies rise first after there is a fall in the market. So, our first investment should be made in the large-cap or the multi-cap funds. And when stability returns to the market turns and you have a good risk profile than you may look forward to small and mid-cap funds. 

Q: So, should I invest this Rs 100 today itself or should be invested in parts?

A: No one can give a perfect answer to this question as you want to ask that has the market reached its bottom today or it will reach there in next one month. So, it depends on your maturity and if your comment is a genuine one that I don't need this Rs 100 for the next five years and will fear about what is happening with it in the next one month than you will wish to invest the maximum portion of the sum today. Normally, we recommend to spread in 3, 6 and 9 months but would not like to say the same today. But can just say that one must not invest the entire Rs 100 because amid this coronavirus there are chances that it may go down more in India. However, it will not have any impact on the Indian economy after two years from here but if the problem rises in short term than the market may come down more and that's why I feel that you should save 50% of the amount for next month or when you feel that the pandemic has been brought under control than you can invest maybe the market will be 5-10% up from these levels. 

Q: Leaders usually changes when the market recovers from the losses and starts moving in a positive direction. Can you tell the segment from which a leader will emerge?

A: If you ask the same question to 10 different people, the answer may vary in each case because everyone has his view and the market will decide whose view was right. But, it is true and I have seen this three times. Every stock was doing well between 1885-92 but the leadership shifted to the IT industry when it fell in 1992. The segment leads the market from 1992-2000 after which the leadership position moved from IT industry to the old economy then after the 2008 fall the leadership position moved from infrastructure, NBFC and Power Utility to FMCG, Pharma and other sectors. 

It also has a logical reason and that is, as long as a group of shares or sectors provides continuous returns than a comfort level are reached and there is a decline in perceived risk about it. And gives a feeling that if the segment is doing well and is making money then why a person should shift to falling shares or the cheap ones. But, the view on the share that has turned expensive despite such a correction has turned up to be a realistic view. I am watching it carefully and I also have a lot of professional interest to see whether there will be a change in leadership in the market after this fall or not. I believe it will happen but opinion is different on where it will shift. I have seen the businesses/shares that haven't seen the pain in the last 10 years but their returns have been very low, which means they are cheap. And, it has been seen that the leadership moves to such sectors. 

Q: Some metal, pharma or something else?

A: Many sectors are there but I would just like to say that the PE of consumption-oriented sectors - may be directly or indirectly - are expensive. Apart from this all other sectors are available at fair value or quite below this level. 

Q: What is your suggestion to mutual fund investors as well as direct investors who have a feeling to get out from the market as soon as he gets a proper return?

A: I can't say anything about the shares because every individual has a different view on every share and offloading a few shares can be correct while selling others may be a wrong decision. But, I feel that if anyone who has a diversified equity fund and its value is within his/her risk capacity then selling the same is not a great decision for the person. I can just share an experience that the investments made in the most difficult times yield the best results and vice versa. An investment made during the bad times has provided best returns while the investments made at good times has provided average returns in the long term. This happens because the sentiment in the market can change in every two months i.e. things have turned bearish today which may turn bullish after two months or so. Interestingly, there is no change in the value of the companies and there is a change in market price. So, the value remains the same but investment when the price is down by 30% may turn up to be a good investment. Thus, if you have a holding capacity then you must not offload it but should invest more. 

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Q: Guru Mantra for retail investors in this market?

A: The Guru Mantra always remains the same that don't invest beyond your capacity. A lot of IQ is not needed in the share market. It just requires the right understanding and patience. If we are less invested then our capability at such a time then it should be increased. The second Guru Mantra is, never invest by borrowing. And, if you are participating in F&O then this is one of the good incidents as it will allow us to learn about the real risks of the segment. Thus, it is better to stay with our investment in the segment where we can hold on for the next 3-5 years.